Selection of Functional Backgrounds of New CEOs in Large U.S. Manufacturing Firms, 1981-1992

The Circulation of Corporate Control: Selection of Functional Backgrounds of New CEOs in Large U.S. Manufacturing Firms, 1981-1992

William Ocasio

During the 1960s and 1970s, executives with financial backgrounds gained prominence in U.S. industrial enterprises, attaining the highest levels of the organizational hierarchy and achieving control over how the corporate purpose was conceived, defined, and executed (Hayes and Abernathy, 1980; Fligstein, 1987). The rise of finance personnel to positions of formal authority led to a transformation in critical outcomes and strategies in large corporations (Fligstein, 1985, 1990; Davis and Stout, 1992; Fligstein and Brantley, 1992; Mizruchi and Stearns, 1994). The rise to power of financial CEOs altered the agenda and direction of large U.S. industrial corporations and led to an articulation of corporate assumptions, values, and goals that Fligstein (1990) has termed the finance conception of control. According to this conception, the corporation is a portfolio of diversified businesses earning differential returns. It focuses on attaining short-term profitability, using financial tools to evaluate existing product lines and divisions and engaging in mergers and acquisitions as central elements of corporate strategy (Fligstein, 1987, 1990).(1)

The decade of the 1980s, however, was characterized by widespread changes in corporate governance, including hostile takeovers (Davis and Stout, 1992), corporate restructurings (Useem, 1993), and the decline of conglomerate forms of organization (Davis, Diekmann, and Tinsley, 1994). These changes were accompanied by ideological challenges to the finance conception of control and the view of the corporation as a portfolio of business assets that could be managed through the use of economic and financial indicators. The question is whether the rise in the prominence of financial CEOs and the finance conception of control continued during the 1980s and early 1990s. To explore how these economic and ideological changes affected prevailing conceptions of control, we studied the selection of functional backgrounds of new CEOs in U.S. manufacturing firms during 1981-1992. In doing this, we extend and develop earlier theory on intraorganizational political dynamics and apply it to the study of stability and change in CEOs’ functional backgrounds.

We analyze the contests for control among elite members of functional groups within organizations (Perrow, 1970; Zald and Berger, 1978; Fligstein, 1987; Chaves, 1993). Our study complements recent research that highlights political struggles between the CEO and the board of directors (Wade, O’Reilly, and Chandratat, 1990; Westphal and Zajac, 1995) but focuses instead on the conflicts within top management (Hambrick, 1994). We develop a conceptual model of changes in corporate control – the circulation of corporate control – that highlights the obsolescence and contestation of executive power, as corporate elites vie for status, position, and control of the organizational hierarchy (Ocasio, 1994). We contrast our model with the model of the institutionalization of power (Salancik and Pfeifer, 1977; Pfeifer, 1981). While both models rely on political, cultural, and social psychological mechanisms, they vary in how they explain stability and change in power in organizations and the rise and fall of alternative conceptions of control (Fligstein, 1990).

POLITICAL DYNAMICS IN ORGANIZATIONS

Institutionalization of power. The institutionalization of power (Salancik and Pfeffer, 1977; Pfeffer, 1981; Boeker, 1989) is the dominant model of political dynamics in organization theory.(2) It highlights the ability of powerful individuals and groups to entrench themselves in the formal positions of authority and to increase their control of the corporation over time. The institutionalization of power is shaped by symbolic as well as material forces that operate both within the organization and at the level of the organizational field. According to this theory, conceptions of control (Fligstein, 1990) serve to institutionalize the power of dominant groups, as the goals and orientation of the governing subunit become infused with value (Selznick, 1957) and corporate elites protect and enforce these values by implementing programs and selecting executives consistent with dominant ideologies. Institutional forces create both normative and mimetic pressures for isomorphism (DiMaggio and Powell, 1983), as the power of the dominant group becomes culturally embedded within the field’s dominant conception of control (Fligstein, 1987, 1990).

Circulation of corporate control. In large industrial corporations control of formal authority and the means of administration resides in corporate elites, the corporation’s senior executives or top management. These corporate elites are subject to intraelite conflict, circulation, and change as diverse individuals and factions contend for control over the organization’s dominant ideology and ruling coalition (Michels, 1962; Zald and Berger, 1978; Hambrick, 1994; Ocasio, 1994).(3) The circulation of corporate control – the instability in formal authority at the top of large corporations – is the dynamic outcome of how contests for control play out in a changing environment among contending individuals, groups, and identities (White, 1992). While at any one point, one individual and function will gain control over the firm’s political coalition, the leadership in the dominant coalition will change across generations of executives, as different issues and problems come to the forefront and require attention in the firm’s environment (March, 1962; Cyert and March, 1963; Ocasio, 1997). Which individuals and groups are in positions of authority over the dominant coalition over the long run is inherently unstable, as the outcome of recurring political struggles will lead to sequential attention to the firm’s issues and problems, with resulting fluctuations in executive power.

The circulation of control is guided by two interrelated mechanisms: obsolescence and contestation (Ocasio, 1994). Obsolescence refers to the relative stability in schemas, ideologies, and conceptions of control held by executives and the functional subunits they represent, at the same time that the firm’s economic, political, and cultural environments are changing. Ocasio (1994) identified two sources of obsolescence that lead to a circulation of power of individual executives: technical and political obsolescence. Technical obsolescence occurs as the ability of executives to provide satisfactory solutions to the strategic contingencies faced by organizations declines over time. Political obsolescence refers to executives’ continued reliance on their

original sources of power, without deriving new bases of social and cultural capital to sustain their power as the firm’s political environment changes. An additional source of obsolescence is ideological obsolescence. Conceptions of control represent organizational ideologies that both guide corporate action and serve to legitimize the power and control of elite actors (Fligstein, 1990, 1996). Ideological obsolescence occurs as challenges to existing ideologies increase over time, and new ideological models serve to justify political contests by alternative elite groups.

Closely linked to obsolescence is contestation among competing factions and organizational elites. Contestation refers to the emergent and recurrent struggles for position and control among contending individuals, groups, and identities within organizations (White, 1992). Unlike the model of the institutionalization of power (Pfeifer, 1981), which assumes that at any point in time executive power is taken for granted, the model of the circulation of control assumes that the power of executives is subject to challenge, political struggle, and contestation (Jackall, 1988). While political struggles among executives are often hidden behind the bureaucratic ethos of organizations, executive succession brings them to the forefront, with internal contests for power and control over the corporation increasing over time (Ocasio, 1994) and triggered by changes in the organization and its environment (Tushman and Romanelli, 1985).

According to the theory, obsolescence and contestation occur within organizations, organizational fields, and societal sectors. The circulation of corporate control is thereby a cross-level process that applies to the recurrent struggles among individuals, intraorganizational groups, and interorganizational groups for command and control of formal authority and the means of administration in society. Individual contests for power are shaped by local contests among organizational subunits that in turn are shaped by interorganizational contests for control at the level of the industry and the organizational sector. The outcomes of these political struggles serve to define who gains formal authority over the corporation and what the critical problems are that the organization must face. According to this view, resource dependencies and structural contingencies are not objective criteria but are historically situated social constructions that are themselves the subject of conflict between contending factions.(4)

Circulation of functional backgrounds. According to the model of the circulation of control, CEO succession and selection trigger a contest for control among contending factions of the firm’s dominant political coalition (White, 1992; Ocasio, 1994). The selection of CEOs with particular functional backgrounds reflects two interrelated contests for control: the competition for formal authority at the top of the corporate hierarchy and the intellectual and ideological struggle over the definition and formulation of corporate purpose, strategies, and goals. The outcome of these contests is shaped by the degree of obsolescence associated with the functional backgrounds of previous CEOs versus the functions of contending subunits. The technical, ideological, and political obsolescence of functional subunits decreases the ability of groups to maintain their power and control over the corporation over time and across multiple generations of executives. Furthermore, the degree of obsolescence is shaped by the relative power and position of the functional units at the level of the industry and sector.

Our theory of the circulation of control presents an extension and modification of the pure model of circulation of power previously developed by Ocasio (1994). At any one time, the prevalence of entrenchment versus political change, and thus the degree of circulation among functional units, is contingent on environmental circumstances (Virany, Tushman, and Romanelli, 1992). Ideological struggles also play an important role in elite circulation, as ideological obsolescence at the sectoral level is likely to affect the perceived obsolescence of executives at both the industry and organizational level. These ideological struggles are particularly likely to affect financial executives during the period studied, as challenges to the financial conception in manufacturing led to increased obsolescence of finance CEOs and decreased ability of finance executives to entrench themselves.

Conceptions of control as contending styles. We follow White (1992) in distinguishing two forms of cultural conceptions in organizations: styles and institutions. We define a style as a cultural frame used by actors with a common role or structural position both to guide their behavior and attain status and power for themselves and for other actors occupying equivalent roles. White (1992: 17, 166-167) portrayed styles as profiles or formulas that integrate behavior across disparate network populations and that emerge in fluid social contexts characterized by a wide variety of formations and stochastic processes. Styles constitute a particular identity for actors and serve as cultural resources in their social and political contests. For example, according to this view, conceptions of control are styles that reflect the cultural frames used by production, marketing, operations, and finance personnel in U.S. industry to make sense of reality, solve the problems of the corporation, and attain status, power, and wealth.

Table 1 summarizes key differences between institutions and styles. White distinguished styles from institutions as the former emerge under conditions of ambiguity and are maintained by the structural positions of actors with a particular style. Styles, unlike institutions, are not taken for granted but are subject to emergent contests for control among actors with different styles. While both institutions and styles provide cultural frames to guide organizational action, they vary in the strength of their cultural assumptions, the degree to which they are isomorphic across organization fields, and in how they shape organizational inertia. Institutions are relatively inert, and change is exogenous, infrequent, and episodic. Styles, in contrast, are subject to frequent endogenous change and short-term fluctuations. The greater cultural control that characterizes institutions relative to styles is reflected in differences in the sources of power, the stability of dominant elites, and the degree of elite hegemony over the organization and organizational field.

The circulation of corporate control implies that conceptions of control are not institutionalized but are best characterized as contending styles subject to intra-and interorganizational struggles for control. Fligstein’s conceptions of control could be interpreted, however, as either styles or institutions. While Fligstein’s (1987, 1990) earlier formulations imply that conceptions of control become institutionalized across the U.S. industrial sector (see also Davis, Diekmann, and Tinsley, 1994), his more recent work (Fligstein, 1996) suggests both greater fluidity and impermanence and that conceptions of control are more of a cultural tool (Swidler, 1986) that elites employ to gain power and control, rather than a taken-for-granted rule (Meyer and Rowan, 1977; Zucker, 1977). In examining the applicability of alternative models of political dynamics we consider whether alternative conceptions of control in the U.S. manufacturing sector are best understood as styles, as in the model of the circulation of control, or as institutions, as in the model of the institutionalization of power.

The circulation of corporate control can be characterized as the process of contestation among different styles over the prevailing theory to guide the governance of organizations, handle the ambiguity associated with executive positions, and control the formal command posts in organizations. Economic and political contingencies trigger contests for control [TABULAR DATA FOR TABLE 1 OMITTED] among different factions tied to different styles (White, 1992). Under conditions of adversity or ambiguity, latent political and ideological differences among members of the corporation’s dominant coalition become manifest (Ocasio, 1994). Predominant styles become increasingly challenged, leading to temporal instability and impermanence in power and control over the organization. Individual contests for power are shaped by local contests among contending styles and subunits, which in turn shape and are shaped by interorganizational contests for control at the level of the industry and the organizational sector.

The model of the circulation of corporate control and its emphasis on styles has close similarities to Oliver’s (1992) model of deinstitutionalization. Both emphasize changing external dependencies and conflicting internal interests as drivers of organizational change. But there are important differences. First, the model of the circulation of control, unlike Oliver’s model of deinstitutionalization, emphasizes contestation among multiple distinct styles or cultural frames. Deinstitutionalization, in contrast, refers to the erosion of legitimacy of one particular activity or procedure (Oliver, 1992). In the model of the circulation of control, multiple styles may be legitimate, and their rise and fall may occur independently of their legitimacy. While a decline in legitimacy is a sufficient condition to result in a decline in a particular style, it is not a necessary condition. Second, Oliver’s (1992) conception of institution is broader than that used in this paper. Unlike Oliver, we rely on Meyer and Rowan’s (1977), Zucker’s (1977), and DiMaggio and Powell’s (1991) emphasis on both cultural persistence and hegemonic control as necessary characteristics of institutions. We follow White (1992) in a more restrictive use of the term institution that distinguishes institutions from cultural tools or frames used by strategic actors to gain power and control (Swidler, 1986).

Circulation of Control in U.S. Industry, 1981-1992

Fligstein (1987, 1990) documented the changing patterns and conceptions of control in top executive positions from 1919 to 1979: the early dominance of manufacturing (or production) from 1919 to 1939, followed first by the rise of sales and marketing presidents from 1939 to 1959, and subsequently by finance executives and the finance conception of control. While Fligstein emphasized exogenous structural contingencies and external institutional forces (DiMaggio and Powell, 1983), the model of the circulation of corporate control suggests that internal political dynamics have an independent role in explaining the rise and fall of elite subunits. This model suggests that the rise and fall of the power and control of diverse subunits found by Fligstein (1987, 1990) reflects periods of relative dominance and entrenchment of diverse styles or conceptions of control followed by elite circulation and endogenous contests for control over the corporation.

An examination of the writings of management intellectuals (Guillen, 1994) in the 1980s and early 1990s suggests the emergence of ideological challenges to the finance conception of control. In a widely influential article, Hayes and Abernathy (1980) attributed the loss of international competitiveness of American industry to the excessive reliance on portfolio management practices and short-term financial controls at the expense of long-term investments in technology and production. They associated this financial orientation with the rise of finance (and legal) executives to CEO positions in large manufacturing companies. The conglomerate movement of the 1960s and the portfolio management techniques that became popular in the 1970s were presented as reasons for “managing our way to economic decline” (Hayes and Abernathy, 1980: 67).

Faced with increasing competition from Japanese and foreign firms, declining profits, and the recurring loss of market share and competitive advantage in key industrial sectors, including motor vehicles, consumer electronics, machinery, and office equipment, the popular business and management literatures sought alternative models of managerial practice during the 1980s and early ’90s. It is beyond the scope of this paper to document the multiple approaches offered, but some of the best-selling concepts included theory Z (Ouchi, 1981), strong corporate cultures (Deal and Kennedy, 1982), “sticking to the knitting,” (Peters and Waterman, 1982), the value chain (Porter, 1985), lean production systems, (Womack, Jones, and Roos, 1990), organizational learning (Senge, 1990), core competence (Prahalad and Hamel, 1990), and business reengineering (Hammer and Champy, 1993). While the solutions offered differed widely, they all shared a strong critique of the detached management practices associated with portfolio management, short-term financial controls, and unrelated diversification and an increased emphasis on the implementation of large-scale changes to established production processes and operating practices. By the late 1980s, strategy researchers and practitioners had settled on the resource-based view of the firm (Wernerfelt, 1984) and the related concepts of core competence and dynamic capabilities as dominant approaches to strategic management and control. These alternative conceptions favored CEOs with either production or operations backgrounds at the expense of financial executives and the finance conception of control. For example, those executives with production (including manufacturing) and technical backgrounds were seen as best able to manage the portfolio of competences (Prahalad and Hamel, 1990) and develop and implement the necessary resources for competitive advantage. Alternatively, executives with operational backgrounds, typically those with experience in administration and divisional general management, were seen as better able to implement organizational restructuring (Useem, 1993), which involved changes in the operations of the various organizational divisions.

Our hypotheses focus on how technical, political, and ideological obsolescence led to the decline in power of financial CEOs, relative to those from other backgrounds, in the U.S. manufacturing sector during the 1980s and early 1990s. Our approach reflects the view that explaining stability and change in the power of functional units does not involve identifying historically invariant causal sequences but, rather, involves specifying how the generative social mechanisms identified – obsolescence and contestation over contending functional styles – interact with the prevailing economic, cultural, and political context to generate specific outcomes. We subscribe to Tilly’s (1997: 73) view that “[social] regularities lie in the generating mechanisms rather than in the recurrence of whole structures, the repetition of whole sequences, the reappearance of the same unilinear processes.” This approach is consistent with the call for models in organization theory that reflect the historical particulars of the structures and processes studied (Davis and Stout, 1992). This approach also reflects the ontological assumptions behind White’s (1992) theory of identity and control, which provides an underlying metatheory for our analysis. According to White, contests for control among contending identities (in our case, functional units) constitute the regularities that generate social action. The particular structures, sequences, and outcomes that result from these contests for control are contingent on the prevailing cultural meanings and value systems, the contingencies that provoke the contests for control, and the social position and location of the various identities. Consequently, the hypotheses presented reflect the prevailing historical conditions of the sector during the period studied.

Hypotheses

The intellectual and ideological challenges to the financial conception of control provided a repertoire of alternative styles (White, 1992) that fostered the circulation of corporate control and the decline in finance CEOs and the rise of production and operations. But the 1980s and early ’90s were also characterized by the rise of institutional investors and the mobilization of shareholder power (Useem, 1996), structural changes that ostensibly favor a financial orientation. The corporate reorganizations associated with the rise of stockholder interests typically involve large-scale changes in either production or operations, strategies typically associated with CEOs from production or operations backgrounds. This study examines whether finance CEOs were able to maintain their ascendancy or whether the challenges to their conception of control were associated with their decline in power relative to those from either production or operations.

Strategic contingencies. According to the structural contingencies model (Hickson et al., 1971), positions of power will flow to groups best able to meet the critical problems and contingencies faced by the organization in its environment. According to this view, the financial conception emerged as a solution to problems of control in firms with strategies of related and unrelated diversification, large numbers of mergers (and divestitures), and the multidivisional forms of formal structure (Fligstein, 1985, 1987, 1990). The rise of the financial conception of control was linked during the 1960s and ’70s to the use and formulation of portfolio management techniques and financial controls by CEOs with financial backgrounds.

According to the model of the circulation of control, organizations are political coalitions that sequentially attend to problems in their environments (Cyert and March, 1963). This implies first that previous strategic contingencies will no longer be effective in sustaining the power of dominant functional subunits. This suggests, during the period studied, that finance CEOs became technically obsolete with a decline in their ability to utilize prevailing conceptions of control to meet changing organizational contingencies. Consequently, the technical obsolescence of finance CEOs led to a decline in their ability to gain power in firms with related or unrelated diversification, multidivisional structures, or high levels of merger and divestiture activity. Our predictions here are consistent with Fligstein’s (1987), who found that the size and statistical significance of these variables varied during different time periods in which the various conceptions of control became dominant, consistent with the model of the circulation of corporate control. We use these hypotheses to examine whether Fligstein’s findings of the dominance of the financial conception of control from 1959 to 1979 can be replicated for the subsequent time period or whether, consistent with technical obsolescence and the circulation of corporate control, the challenges to the finance conception limited the ability of these strategic contingencies to favor the selection of new CEOs from financial backgrounds:

Hypothesis 1: During the 1980s and early 1990s, the strategic contingencies associated with the finance conception of control – multidivisional structures, related and unrelated diversification, and high numbers of mergers and acquisitions – did not lead to increased selection of new CEOs from finance, relative to other backgrounds.

The sequential attention to goals (Cyert and March, 1963) implicit in the model of the circulation of control suggests that new contingencies will arise over historical time. During the 1980s and early 1990s, U.S. manufacturing firms were faced with increasing challenges from foreign imports, decreasing their profitability and international competitiveness. The financial conception of control did not provide direct solutions to competitive problems, and the alternative models that favored either production CEOs, based on resources and competencies, or operations executives, based on organizational restructuring, were more likely to be favored in those industries facing a larger proportion of imports:

Hypothesis 2: During the 1980s and early 1990s, the greater the proportion of foreign imports at the industry level, the greater the selection of production and operations CEOs relative to those from finance.

The effects of foreign competition on the selection of functional backgrounds of new CEOs are likely to be moderated by the financial performance of the firm (Cyert and March, 1963). Given the premise that organizational restructurings are associated with failures of performance (Useem, 1993; Donaldson, 1994) and that organizational restructurings are more likely to be associated with CEOs from operations backgrounds, we expect the effects of foreign competition on the selection of functional backgrounds of new CEOs to be moderated by the firm’s performance. Alternatively, for firms with good financial performance, the strategic contingencies associated with imports are more likely to lead to a focus on a firm’s distinctive resources (Wernerfelt, 1984; Prahalad and Hamel, 1990), particularly from manufacturing and research and development, and, consequently, an increase in CEOs from production and technical backgrounds.

We expect both a main effect for decreases in performance leading to increases in operations backgrounds and an interaction effect between performance and foreign imports, with firms with poor performance in import-intensive industries favoring operations CEOs and those with good performance in import-intensive industries favoring production CEOs:

Hypothesis 3a: During the 1980s and early 1990s, a decrease in firm-level financial performance will lead to an increase in the selection of new operations CEOs relative to CEOs with other backgrounds.

Hypothesis 3b: During the 1980s and early 1990s, an increase in financial performance in industries with greater import intensity will lead to an increase in the selection of production CEOs relative to those from operations.

Decline in isomorphism: Obsolescence at the industry level. Technical, cultural, and political forces may interact to lead to similarity in the selection of functional backgrounds of CEOs among firms in the same industry. Institutional theory (DiMaggio and Powell, 1983) posits the role of coercive, normative, and mimetic pressures in leading to isomorphic tendencies in organizational characteristics within an industry. Technical and economic differences among industries may also account for isomorphism. Finally, the intraorganizational power struggle may be shaped at the industry level. Once a set of actors gains dominance and institutionalizes their power, their subunit counterparts within the same industry may use this fact as a basis for gaining power in their respective firms.

According to the model of the circulation of control, isomorphism in functional backgrounds of CEOs is a temporary phenomenon that is unlikely to persist over time and is subject to challenge and contestation. A decline in the power of financial CEOs within an industry may affect the ability of that group to retain control over formal positions of authority in an individual organization relative to other functions within the firm. Given the ideological and technological obsolescence posited for finance, a decline of institutional isomorphism for financial CEOs may be expected relative to those from other backgrounds:

Hypothesis 4: During 1981-1992, isomorphism in the selection of functional backgrounds of CEOs at the industry level will be lower for CEOs from financial backgrounds than for CEOs from other backgrounds.

Annual fluctuations in styles and functional backgrounds. The model of the circulation of corporate control highlights the instability in political dynamics in organizations and the impermanence of alternative styles or conceptions of control. An important distinction in viewing conceptions of control as styles rather than institutions resides in their being subject to short-term trends as fads and fashion create temporary changes in which different managerial styles rise and fall in rates of adoption (Abrahamson, 1996). While changes in styles reflect short-run fluctuations, changes in institutions reflect long-term trends and transformations. Conceptions of control are subject to short-term fluctuations in styles annually, as the influence of business periodicals and publications and the direct social influence of other manufacturing firms affect the selection of new CEOs with a particular background:

Hypothesis 5: The likelihood of selection of a CEO from a particular background will be directly related to the proportion of CEOs from the same background selected by other firms in the sector during the same year.

Organizational-level political dynamics. As suggested earlier, our model of the circulation of corporate control allows for both stability and change in functional backgrounds to be observed, with periods of entrenchment followed by elite circulation as new subunits rise to power. We focus on intraorganizational dynamics to evaluate Fligstein’s (1987: 56) contention that conceptions of control account “not just for organizational change, but organizational stability. This means that what is in place will tend to stay in place…. Any changes in that story could potentially undermine the rationale for any given organization and such revisions will be undertaken only under dire circumstances.” Thus, we follow his suggestion to examine whether subunit power is stable over time (Fligstein, 1987: 57).

A pure model of the institutionalization of power implies persistence in the power of the subunit, with increased entrenchment over several generations of predecessor CEOs. A pure model of the circulation of power implies no persistence in the power of functional units. The circulation of corporate control implies periods of temporary entrenchment interspersed with periods of circulation and change in managerial elites. Elite circulation will increase as the ideological challenges to the subunit increase. This implies that during the 1980s we will find increased circulation of power and decreased entrenchment for financial CEOs relative to the marketing and production categories:

Hypothesis 6a: During the 1980s and early 1990s, CEOs from financial backgrounds will be less likely to be succeeded by CEOs from the same background than by those from other backgrounds.

According to the model of the circulation of corporate control, intraorganizational power is unlikely to persist across multiple generations of CEOs. The impermanence and instability in power are particularly likely for those backgrounds or styles that are most subject to contestation, i.e., for financial CEOs during the 1980s and early 1990s. To test for this effect of long-term entrenchment, we examine how the backgrounds of the two past incumbents influence the background of new CEOs and compare the effects of the entrenchment of financial CE[copyright]s with those of other backgrounds:

Hypothesis 6b: During the 1980s and early 1990s, CEOs from financial backgrounds will experience decreased long-term stability in power relative to those from other backgrounds, as measured by the stability in backgrounds across two generations of predecessor CEOs.

DATA AND METHOD

Sample

Our population included all 280 manufacturing firms listed in the Forbes Sales 500 for 1980, the first year in which data on the functional backgrounds of CEOs were collected by Forbes. The sample was limited to manufacturing to account for sectoral difference in the determinants of CEO background. Among the original companies in the population, 29 companies were dropped due to missing data, for a total of 251 companies in the sample studied. We examined CEO succession events in large manufacturing firms from 1981 to 1992. To avoid sample selection bias, the CEOs of these companies were tracked through 1992, even if they were dropped from the Forbes 500. By 1992 a total of 79 firms, or 30 percent of the sample firms, were acquired, merged with other companies, went bankrupt, or became privately held. One hundred and ninety companies experienced at least one CEO succession during the period, and a total of 275 succession events occurred between 1981 and 1992.

Measures

Functional background of CEOs. A primary source for information on CEOs’ functional backgrounds was Forbes’ annual survey of CEOs’ compensation, published since 1980.(5) The CEO succession events were identified based on the changes in the name of CEOs. Forbes asked the CEOs to identify their functional background as well as their salary level. Forbes used nine categories to classify backgrounds of CEOs: technical, production, sales, marketing, finance, operations, medical, journalism, and legal. In our analysis, the classification has been collapsed into five categories: (1) production and technical, (2) marketing and sales, (3) finance, (4) legal, and (5) operations and other. Categories were grouped based on both sensitivity analysis and on the interrelatedness between functions. The production and technical category includes CEOs from manufacturing, engineering, and research and development. These three functions presuppose a technical background in science and engineering for members of the respective subunits. Marketing and sales are related functions that are commonly joined together in many, if not most firms. Operations is grouped with the remaining categories to constitute the baseline group for comparison purposes. While legal is treated as a separate category in the descriptive analysis, for consistency with Fligstein’s analysis and because there were too few new CEOs from legal backgrounds to treat them as a separate category, we collapsed legal into operations for the multinomial logistic regressions. In results not shown here, however, we reestimated the models following Hayes and Abernathy’s (1980) and Hambrick and Mason’s (1984) influential treatments, which grouped finance and legal in the same functional category. Note that both groups work closely together in the acquisitions and divestitures of companies, which is a central hallmark of the financial conception of control. The results were substantially the same whether legal was grouped with finance or with operations.

Since some of the companies in our sample dropped out of the Forbes 500 list after 1980, we also used Who’s Who in Finance and Industry and proxy statements to identify CEO backgrounds that we could not obtain from Forbes magazine. These sources were also used to identify the functional backgrounds of predecessor CEOs whose tenure ended before 1980. The titles of previous executive positions were used to code the CEO’s functional background, following the classification system developed by Forbes.

Strategic contingencies. Following Fligstein (1987), we included corporate strategy and structure as measures of the strategic contingencies affecting a CEO’s functional background. Strategy and structure were identified using information from annual reports and 10Ks. Following Rumelt (1974) and Fligstein (1987), we coded corporate strategy as product-dominant, related diversification, and unrelated diversification (conglomerate) strategy. A firm was classified as product-dominant when it had one line of business accounting for more than 70 percent of revenues. Firms with related diversification strategies had multiple lines of related businesses, with no single business accounting for 70 percent of revenue. Firms with unrelated diversification strategies were engaged in unrelated business, and no one business accounted for 70 percent of revenue. These strategies were coded as dummy variables, with product-dominant as the omitted category.

Another measure of corporate strategy was the three-year average of the number of mergers and divestitures undertaken by the firm. Because top management attention is required to execute each of the mergers and divestitures, their combined sum provides a measure of the strategic contingency facing the corporation. Data on mergers and divestitures were coded from Moody’s Manual. We conducted sensitivity analysis, running the models with separate measures for mergers and divestitures. Although the models are not nested, so a formal comparison is not possible, the separate measures did not improve the fit of the model, even with three additional degrees of freedom.

For the structure variable, we compared the effects of a multidivisional structure with all other categories, including functional form and holding company. The titles of top officers and the description of companies’ business reported in annual reports, 10Ks, and proxy statements were used to identify whether or not a company had a multidivisional form.

Isomorphism. We began with two-digit Standard Industrial Classification (SIC) codes to calculate industry-level mimetic effects, and there were 19 industries by two-digit SIC code level. Because some industries had too few companies, which made the isomorphism variable unreliable, we collapsed some two-digit SIC code level industries. The collapsed industries included (1) Food and Tobacco, (2) Textile and Apparel, (3) Wood and Furniture, (4) Miscellaneous Manufacturing, and (5) Oil and Petrochemical Refining industries. As a result, the original 19 industries were reduced to 14. Following Fligstein (1987), we captured isomorphism in the functional background of new CEOs by calculating the proportion of CEOs with technical and production, sales and marketing, and finance and legal backgrounds within each industry. The proportion of CEOs with operations and all other backgrounds was the omitted category. Since firms are more likely to mimic successful companies than poorly performing companies, we used manufacturing companies that were listed in Forbes Sales 500 for each year to calculate this variable. In computing the proportion measure, the company was left out of the calculation when it was included in the Forbes Sales 500 for that year. Thus, the proportion of CEOs with each functional background captures the pure effect of the subunit control that existed in the industry for each year. The measure is more appropriate than industry dummy variables in capturing isomorphic effects because it captures not only the similarity of cultural environments for companies within industries, but also the relative strength of mimetic pressure within each industry. The model was also estimated with industry dummies, with no change in the findings for the political dynamics measures. The inclusion of industry dummies, however, changes the effects of the isomorphism variable.

Firm and sector performance. Two measures of economic performance were included in the analysis. Return on assets (ROA) measured as the return on firm assets, adjusted for industry average, was used as a measure of firm performance. Other performance measures, including Tobin’s Q were also evaluated, but no significant effects were found. ROA measures were obtained from COMPUSTAT. Given the increasing attention to foreign competition in the U.S. manufacturing sector, we included an import measure in the analysis. The import variable is simply the amount of imports divided by total output in each industry, by 4-digit SIC code. The import and output variables for each industry were obtained from the U.S. Department of Commerce, Bureau of Economic Analysis. The natural logarithm of the import variable was used in the analysis.

Annual trends. The effects of annual trends and fluctuations in the functional backgrounds of new CEOs were captured by calculating the proportion of CEOs with technical and production, sales and marketing, and finance backgrounds for each year. The proportion of CEOs with operations and all other backgrounds was the omitted category. As for the isomorphism variable, in calculating the total number of CEOs for each functional background, we excluded the background of the CEO for the particular firm year being coded. Thus, the variable captures annual variations in the rate of selection of functional backgrounds for each year and offers a measure of which subunit may be more in fashion during any particular period.

The annual trend variable differs from the isomorphism variable in two ways. The former applies to the level of the manufacturing sector, while the latter applies to the industry. The annual trend variable also accounts for the effects of short-term fluctuations in conceptions of control, consistent with the model of circulation. This differs from a historical trend variable, which assumes monotonic changes in the prevalence of conceptions of control, more consistent with the view of conceptions of control as institutions. The annual changes in selection of functional backgrounds were most variable for marketing and sales, which had the largest number of new CEOs during 1981-1983 but declined significantly thereafter.

Political dynamics. The political dynamics of the CEO succession process were captured by the functional backgrounds of the last two CEOs in office. These two variables measure the stability in power of functional subunits in the firm across generations of CEOs. By including the background of the two previous CEOs, we could test whether the determination of functional backgrounds can be modeled as a simple Markov process or whether previous history affects the determination of who controls the top executive position. The functional backgrounds of previous CEOs were collected the same way as functional backgrounds of new CEOs. Operations and all other backgrounds of previous CEOs was the omitted category.

We used the previous history of functional backgrounds to determine, at the organizational level, the political obsolescence of prevailing conceptions of control. According to the political coalition view of the firm that underlies the circulation of control, the selection of any one background will entail a quasi-resolution of conflict, but every new succession triggers a new conflict or contest among contending functional units. While political obsolescence is not directly observed, the instability in power of functional subunits across generations of CEOs is consistent with the view that power is impermanent, and historical sources of power become obsolete over time.

Control variables. Organizational size, measured as the logarithm of assets as reported in COMPUSTAT was used as a control variable. We tested other control variables and potential sources of strategic contingencies, including firm age, employment growth, R&D spending, and advertising spending, but these variables were either not statistically significant or only marginally significant and did not materially change the remaining results. Given the relatively large number of variables included in the models estimated, we do not [TABULAR DATA FOR TABLE 2 OMITTED] include these other control variables in the results presented. An indicator variable was also included as a control to record firms that have experienced multiple CEO successions during the sample period.

Modeling Procedure

We used multinomial logistic regression available in STATA to test the hypotheses. Multinomial logistic regression estimates simultaneous logistic regression models, with pairwise comparisons of each functional category with the base category. The base category was new CEOs of operations and other backgrounds. Therefore, the model estimates parameters of given predictor variables for the likelihood of new CEOs of technical and production, marketing and sales, and finance backgrounds, respectively, versus the base category, operations and others. In determining statistical significance, we must consider not only the individual parameter estimates but also a comparison of parameter values across the equations estimated.

RESULTS

Table 2 presents descriptive statistics: means, standard deviations, and correlation coefficients for the 275 succession events included in the sample. Table 3 presents the distribution of functional backgrounds of CEOs for the 251 firms in our sample. Data are presented for 1961, 1971, and 19811992. In 1981 finance and legal were the dominant functions, followed by operations and others, then marketing and sales, [TABULAR DATA FOR TABLE 3 OMITTED] and production and technical. Table 3 shows a decline in finance and legal by 1983, accompanied by an increase in the proportion of both operations and others and production and technical. Finance and legal were no longer the dominant categories, being surpassed by operations and others. By 1987, finance and legal were also surpassed by production and technical. Finance and legal dropped to 21 percent by 1992, compared with 24 percent for production and technical and 37 percent for operations and others. The drop was greater for legal than for finance backgrounds. Finance backgrounds dropped from 22 percent in 1981 to 16 percent in 1992. The corresponding decrease in legal was from 12 percent to 5 percent. The results are robust across alternative samples. Similar results were found for manufacturing firms in the Forbes 500 (including newcomers to the Forbes 500 after 1980 and excluding firms who dropped out of the Forbes 500) and for the top 100 industrial firms (including services and retailing), the populations used by Fligstein (1987). In all cases, the period of the 1980s and early 1990s showed a decline in both finance and legal CE[copyright]s relative to other backgrounds.

These results provide evidence that during the 1980s and early 1990s, financial CEOs failed to maintain their relative position in large U.S. manufacturing companies. At the sectoral level, the decline in financial CEOs as both production and operations CEOs increased provides evidence of the circulation of corporate control. Production and technical backgrounds, which had declined since the 1940s, experienced a relative increase during the 1980s. Operations CEOs experienced the greatest gain, from 24 percent in 1981 to 37 percent in 1992, but this followed a decline from 1971 to 1981. This pattern of findings suggests that functional backgrounds are subject to recurrent patterns of rise and decline, with limited stability in the power and dominance of any one background.

Stability and Change in Functional Backgrounds

Table 4 presents a classification of the functional backgrounds of new CEOs by the backgrounds of their predecessors. This tabulation describes the intraorganizational mobility in the backgrounds of the CEOs appointed from 1981 to 1992. The diagonal in the table represents the cases of stability in functional backgrounds of CEOs, with 100 out of 275 [TABULAR DATA FOR TABLE 4 OMITTED] succession events, or 36 percent of the sample. The proportions of backgrounds of previous CEOs and successors from the same background are 21 percent for finance, 4 percent for legal, 36 percent for operations and others, 40 percent for marketing and sales, and 54 percent for production and technical. These compare with a proportion of 15 percent for finance among the 275 succession events, 3 percent legal, 35 percent operations and others, 19 percent for marketing and sales, and 28 percent for production and technical backgrounds. These results support hypothesis 6a, on the limited stability of CEOs from financial backgrounds. Only the production and marketing categories show statistically significant effects for stability in the functional backgrounds of new CEOs, as confirmed by a log linear analysis of the classification counts, shown in table 5. Neither financial nor operations CEOs evidence significant entrenchment during this period. Overall, instability, rather than stability in power, is the norm for functional backgrounds of new CEOs. At the organizational level, 64 percent of all CEO selections resulted in changes in functional backgrounds.

The results in tables 4 and 5 provide initial support for the importance of intraorganizational political dynamics and for the circulation of corporate control. Both production and technical and marketing and sales backgrounds increased with prior experience with CEOs of the same background, providing evidence of entrenchment at the organizational level. No entrenchment was found, however, for CEOs from finance and legal or operations and other backgrounds. The finance and legal backgrounds, which had been dominant in the 1960s and 1970s were not able to maintain control over the top command position in the firm during the 1980s and early 1990s, consistent with the model of the circulation of corporate control. The log linear analysis also shows that the stability of functional backgrounds was significantly greater for production and marketing than for other backgrounds. Notably, operations backgrounds, which are now relatively prevalent, were also not able to entrench themselves during the period studied.

Table 5

Log Linear Analysis of Intraorganizational Stability of Functional

Backgrounds of CEOs in U.S. Manufacturing Firms(*)

Functional stability Coefficient Standard error

Production and technical 1.550(***) .307

Marketing and sales 1.336(***) .342

Finance .358 .428

Legal .070 1.084

Operations and others -.380 .294

*** p [less than] .001.

* Parameters for functional origins, destinations, and constant

term not shown.

Determinants of Functional Backgrounds of New CEOs

Table 6 presents the results of multinomial logistic regression models of selection of functional backgrounds of new CEOs. Two alternative models are presented: model 1 includes the results of the structural contingency and isomorphisin hypotheses only and replicates Fligstein’s analysis for the 1981-1992 period; model 2 adds the additional variables identified in this paper: annual fluctuations in the selection of new CEOs, the political dynamics variables, the effects of ROA, imports, and their interactions.

Table 6 also shows the statistical significance of the variables included in the two models, as measured by the chi-square contrast. Significance must be assessed not only for individual parameters but also for the differences among parameters of the same variable across the different outcomes of the dependent variables (i.e., across the three functional categories). We estimated significance by calculating the chi-square contrasts between models 1 and 2, respectively, and an alternative specification that omits the specified independent variable as a determinant of the three categories of production and technical, marketing and sales, and finance.

The overall comparison of models 1 and 2 shows that the model of the circulation of control significantly adds to the baseline model. The chi-square contrast between models 1 and 2 is 104.99 with 36 degrees of freedom, statistically significant at the .001 level. These results show that the model of the circulation of control adds to the understanding of the determinants of functional backgrounds in Fligstein’s (1987) study. We found similar results, not reported here, by reestimating model 2 without the variables that were not significant in model 1, conserving degrees of freedom.

Strategic contingencies. Model 1 uses four measures of strategic contingencies – multidivisional structure, related diversification, unrelated diversification, and mergers and divestitures – to analyze the determinants of functional backgrounds of new CEOs. As shown in table 6, mergers and divestitures was the only variable found to be statistically significant in model 1 (overall significance at the .05 level), with negative coefficients on production and marketing backgrounds relative to operations and other categories, significant at the .05 level. The coefficient of mergers and divestitures on finance CEOs (relative to operations and others) is negative but not statistically significant. These effects show that firms with large numbers of merger and divestiture activities [TABULAR DATA FOR TABLE 6 OMITTED] are less likely to select production and marketing CEOs than either those from finance or operations and others. Both merger and divestiture activities were widely prevalent during the 1980s and remain an important determinant of the functional backgrounds of new CEOs. But this strategic contingency is now as likely to favor CEOs with operations backgrounds as CEOs from finance. The effects of mergers and divestitures remain in model 2, with the variable remaining significant at the .05 level.

The general findings provide support for hypothesis 1, on strategic contingencies no longer favoring finance CEOs and contributing to the circulation of corporate control. Contrary to Fligstein’s (1987) findings for the previous two decades, no support is found for the effects of multidivisional form or related or unrelated diversification (conglomerates)in explaining the CEO’s functional background. These effects were central to the dominance of the financial conception of control during the 1960s and 1970s, as finance CEOs were more likely in conglomerate firms and those with multidivisional structures. The effects of multidivisional form and unrelated diversification variables on finance CEOs are now negative, although not statistically significant. Interpreting findings that fail to reject the null hypothesis is often treacherous, because the lack of statistical significance could be due to the low power of the test. But for these two variables, the maximum likelihood estimates of the effects are in the opposite direction from those obtained by Fligstein (1987) for 1959-1979. While there are differences in the samples between the two studies, the changes in explanatory power between different time periods suggest that the effects of structural contingencies on subunit power are not independent from the dominant ideologies and conceptions of control for each time period. This interpretation is consistent with Fligstein’s finding that the effects of structural contingency variables varied with the dominant conceptions of control. For example, he found that multidivisional firms favored both marketing and finance presidents during 19391959 when the marketing conception prevailed, but only finance presidents during the 1959-1979 period, when the financial conception became dominant. The failure of multidivisional structures and unrelated diversification strategies to result in an increased likelihood of finance CEOs during the 1980s and early ’90s suggests a decline in the financial conception of control, which articulated a link between these contingencies and financial executives.

Model 2 adds new strategic contingencies for economic performance, imports, and their interaction. The main effect of imports is not significant, and hypothesis 2 is not supported. The main effects of ROA are positive for production at the .01 level and for finance at the .10 level. This suggests that increased performance will lead to increases in production and, to a lesser extent, financial CEOs relative to operations CEOs. With a decline in performance, however, the proportion of operations CEOs increases, consistent with hypothesis 3a. The interaction effects of ROA and imports is significant at the .01 level for production, consistent with hypothesis 3b, with an overall level of significance for the interaction effect at the .05 level. The combined results show that poor economic performance increases the likelihood of operations CE[copyright]s, associated with organizational and operational restructuring. Strategic contingencies associated with increased imports at the industry level will increase the likelihood of production CEOs for firms with high levels of economic performance and of operations CEOs for firms with poor economic performance.

Isomorphism. An examination of the industry isomorphism variables in model 1 shows that the effects of the proportion of firms in an industry with a CEO of a given background had an effect on the selection of new CEOs only for the proportion of CEOs from production and technical backgrounds. In model 1, the effect is statistically significant at the .01 level for the production and technical isomorphism variable and not significant for the others. The industry isomorphism effect for production and technical is significant at the .01 level for the coefficient of production and technical relative to the baseline category, as well as relative to marketing and sales. The evidence for the institutionalization of production CEOs at the industry level is complicated by the fact that the differences with finance are not statistically significant – the greater the proportion of production and technical CEOs in an industry, the greater the proportion of new CEOs from finance, significant at the .05 level. Industries with large proportions of production CEOs are almost as likely to have finance CEOs as production CEOs. Also, the effects of the proportion of marketing CEOs and proportion of finance CEOs are not statistically significant in model 1. The effects of the isomorphism variables remain in model 2, with a significance level of .05 for production, and no effect for the other categories. The results of the isomorphism variables in model 1 are consistent with hypothesis 4, on the circulation of corporate control for financial CEOs at the industry level, with lower levels of organizational field entrenchment than CEOs from production and technical.

Annual fluctuations in functional backgrounds. Hypothesis 5, on the effects of annual fluctuations in management styles shaping the circulation of corporate control, receives support for marketing and sales CEOs, as well as finance CEOs. Annual fluctuations serve to differentiate marketing and finance CEOs from operations; the annual percentage of production and technical CEOs has no statistically significant effect on production and technical CEOs. The effects of the annual percentage of marketing and sales CEOs has a statistically significant effect at the .01 level for the selection of marketing and sales CEOS and is also significant at the .01 level across all backgrounds. The annual percentage of finance CEOs has a significant effect at the .01 level on the selection of finance CEOs; the overall significance level is at the. 10 level. These findings suggest that annual fluctuations in managerial styles contribute to the instability in power of the various conceptions of control.

Political dynamics. The political dynamic variables in model 2 show how the history of the functional background of the two previous CEOs affects the functional background of new CEOs selected. The model allows an examination of how intraorganizational power may persist or change across several generations of CEOs. The effects of the immediate predecessor in model 2 support the entrenchment of power at the corporate level for production and technical CEOs and marketing and sales CEOs, significant at the .05 level, but not for finance CEOs. While the individual coefficients of prior marketing and sales on marketing and sales (relative to the baseline category) are statistically significant at only the .10 level, the effects on marketing and sales relative to both production and technical and finance CEOs are statistically significant at the .05 level. This suggests that the persistence of marketing CEOs is more likely to result in fewer production and finance CEOs, rather than fewer CEOs from operations and other backgrounds. At the corporate level, the subunit power of production and technical and marketing and sales become entrenched, as the subunit once in power is more likely to maintain the position of CEO. For CEOs with prior backgrounds in finance, the differences between the categories are not statistically significant.

The results of the prior CEO variable provide support for hypothesis 6a, which states that during the period studied, CEOs from financial backgrounds will be less likely to be succeeded by CEOs from the same background relative to those from other backgrounds. To test this hypothesis formally, we examine the differences between the coefficients of entrenchment for production and technical and finance CEOs (.953 and -.382, respectively). The chi-square contrast between model 2 and a constrained model that equates the value of the two coefficients is significant at the .01 level. The chi-square contrast between model 3 and a constrained model that equates the values of the prior marketing and sales CEOs with the prior finance CEOs (with values of .918 and -.382, respectively, in model 2)is statistically significant at the .05 level. Comparing the coefficients across equations shows that stability in finance CEOs is significantly lower and their impermanence in power is significantly higher than for production and technical and marketing and sales CEOs.

Long-term persistence across two generations of previous CEOs was found only for the marketing and sales categories. While the second previous generation of CEOs from production and technical backgrounds decreased the subsequent proportion of finance relative to operations, they did not increase the proportion of CEOs in the same production and technical category itself. The statistical significance of the second prior CEO from a production and technical background, significant overall at the .10 level, with all three coefficients negative, suggests that these firms will have a significantly higher proportion of CEOs from operations backgrounds. While production and technical CEOs increased in total from 1981 to 1992, this increase did not reflect any long-term entrenchment at the corporate level of CEOs from this functional background but, rather, a long-term shift to operations CEOs, consistent with the circulation of corporate control. Marketing and sales was the only background with long-term entrenchment of CEOs in power, as measured by the background of the second previous CEO. The effect on the selection of marketing and sales CEOs is significant at the .01 level, as is the variable across all categories. The long-term entrenchment of marketing and sales CEOs occurs even though marketing and sales CEOs were not dominant across the manufacturing sector. These results are not consistent with the model of the institutionalization of power, which would imply that long-term entrenchment is associated with increased dominance and sectoral-level institutionalization. The long-term entrenchment of marketing and sales, while not predicted a priori, is consistent with the model of the circulation of control. While both operations and, to a lesser extent, production and technical CEOs rose in power during the 1980s, their power was not taken for granted and remained contested. Contestation of power was less likely, however, in those firms with histories of selecting marketing and sales CEOs, leading to increased entrenchment of marketing and sales CEOs in those firms.

There is no support, however, for the historical entrenchment in power of CEOs across all backgrounds, as these results do not hold for either production and technical or finance CEOs. Hypothesis 6b is supported by a comparison of the persistence of the second previous CEO from marketing and sales with finance (with coefficients of 1.790 and -.723, respectively). The chi-square contrast between model 2 and a constrained model that equates the values of the second prior marketing and sales CEOs with the second prior finance CEOs on their own respective backgrounds is statistically significant at the .01 level. Consistent with the model of the circulation of control, the results show that for the period studied, intraorganizational power is significantly less stable and more impermanent for finance CEOs than those from marketing and sales.

Control variables. Firm asset size, included as a control variable, increased the selection of new CEOs from production and technical backgrounds, relative to both finance and the base category, significant at the .01 level in models 1 and 2. The effects of asset size also increased the selection of marketing and sales CEOs in model 1, significant at the .05 level, but the effects were no longer significant in model 2. One possible explanation is that during the time period studied the power of production and technical subunits increased for manufacturing firms and that larger firms were more likely to lead these sectoral changes. Another possibility is that asset size reflects a strategic contingency associated with investments in fixed capital and that for the time period studied, CEOs from production and technical background were seen as best able to meet the challenges of large capital investments. In contrast, size had no effect in Fligstein’s (1987) study, although his sample differed, because it included retailing and service firms and was limited to the top 100 firms for each decade. Our control variable for multiple CEO successions was not statistically significant in either model 1 or model 2.

DISCUSSION AND CONCLUSIONS

This paper contributes to the analysis of changes in functional backgrounds and conceptions of control in U.S. manufacturing and to the examination of the underlying intraorganizational political dynamics. The theoretical contribution of this paper is a new model of political dynamics, the circulation of corporate control, contrasted with the model of the institutionalization of power. While prior functional backgrounds were found to affect the backgrounds of new CEOs, we found no simple universal pattern of entrenchment or circulation of power across all backgrounds. We found, instead, that both processes occurred for different backgrounds and at different levels of analysis. The pattern of results is inconsistent with the strong version of the model of the institutionalization of power, in which political dynamics lead to entrenchment of the power of functional units at the level of the sector, the industry, or the firm. Instead, the overall pattern of results is more consistent with the model of the circulation of control. We found, at the sectoral level, an overall decline in financial CEOs during the period, a declining effect of strategic contingencies associated with the finance conception of control, and annual fluctuations in managerial fashions affecting the selection of functional backgrounds of new CEOs. At the industry level, institutional isomorphism effects were only found for CEOs with production and technical backgrounds. At the organizational level, the ability of functional units to entrench themselves varied among function, but these effects were significantly lower for finance and operations than for production or marketing.

Whither finance? We found that finance CEOs have declined from 22 percent in 1981 to 16 percent in 1992. Furthermore, the determinants of financial CEOs found by Fligstein (1987), the multidivisional firm, related and unrelated diversification, and proportion of firms with financial CEOs, no longer hold for the 1981-1992 period. Only the number of mergers and acquisitions is higher for finance CEOs than for production and technical or marketing and sales CEOs, but this variable no longer distinguishes financial executives from those with operations and other backgrounds. Finally, there is no evidence of entrenchment of power for CEOs with financial backgrounds. The combined findings all suggest a decline in finance CEOs and the financial conception of control since 1981.

The failure of finance CEOs to persist during the 1980s shows quite a distinct pattern. No entrenchment was found at either the industry or corporate level, consistent with the model of the circulation of control. The strategic and structural contingencies that explained the rise of finance CEOs to top executive positions from 1959 to 1979 in Fligstein’s (1987) study were no longer valid during the 1981-1992 period. The related diversification and multidivisional firm measures, while not statistically significant, were in the opposite direction from prior findings. This historical change is consistent, however, with Fligstein’s (1987) finding that the effects of strategic contingencies on subunit power depend on the conceptions of control that dominate during each time period. More specifically, these results suggest that the intellectual and ideological challenges to the finance conception have severed the link between the contingencies associated with diversification strategies and multidivisional structures and the ability of finance CEOs to effectively meet the challenges confronted. This interpretation is supported by the effect of the annual fluctuations variable on the selection of finance CEOs relative to operations CEOs. Field-level changes in the dominance of finance led to a decline of finance CEOs relative to operations CEOs. There was also partial support for decline in firm-level profitability leading to selection of operations CEOs relative to finance CEOs.

The pattern of the circulation of financial CEOs since 1981 is tied to the ideological challenges to financial elites and to their association with portfolio management and the financial conception of control. We found that the decline in power of finance CEOs at the level of the sector, industry, and firm and the ideological challenges to the financial conception of control and to portfolio management during the same period were accompanied by a blurring of the distinct identity of finance from operations. While the selection of financial CEOs can be distinguished from production and technical and marketing and sales by the lower merger and divestiture activity in firms that select CEOs from these two functional categories, finance cannot be distinguished from operations and others along this dimension. Instead, as discussed earlier, the decline in finance relative to operations is accounted for by annual fluctuations in sectoral level support for finance relative to operations and by lower rates of return on assets, supporting operations CEOs relative to finance CEOs.

To explain the decline in finance as a separate identity in the CEO selection process we propose two interrelated explanations for further study. First, the ideological challenge to the financial conception of control and to portfolio management weakened the theory behind the financial style. Portfolio management declined in legitimacy in U.S. industry, decreasing the ability of finance CEOs to rely on portfolio management as a means of attaining power. This ideological challenge altered both the organizational practice of managing the firm as a portfolio of financial assets and the political dominance of financial CEOs, identified with the financial conception. Second, financial CEOs are now more likely to have a Master’s in Business Administration (MBA) as a general management degree, rather than obtaining their financial identity through on-the-job training and identification with the finance function. The MBA identity for finance CEOs may be increasingly indistinguishable from a general managerial and MBA identity for operations CEOs, as financial executives have abandoned their identification with portfolio management practices. CEOs from production and technical and marketing and sales may have closer links to these distinctive functions. Further research is required to examine the direct linkage among these changes in ideology and educational background, the decline in the practice of portfolio management, and the decrease in financial CEOs during the 1980s and early 1990s.

The circulation of corporate control? This study builds on and modifies Fligstein’s (1987, 1990) analysis of changes in conceptions of control and CEOs’ functional backgrounds, but our findings suggest a more fluid process of CEO selection than does his account. The complex pattern of entrenchment and circulation of CEOs from different backgrounds is consistent with the model of the circulation of control developed here. While a more comprehensive test of the model would require an examination of longer historical time periods, the overall pattern of results support the model. Consistent with the model, the political entrenchment of functional subunits was found to be a temporary phenomenon unlikely to persist across multiple generations of executives. As expected, neither the institutionalization nor the circulation of power were found to be invariant sequences that occur for all backgrounds and across all time periods. The results show instead that, during the period studied, the ability of finance and operations CEOs to maintain their control and command over formal authority was limited.

In particular, the circulation of corporate control explains the decline in financial CEOs during the 1980s and early 1990s. Ideological challenges to financial CEOs, coupled with increasing foreign competition led to increased circulation of financial CEOs and instability in their power. The study showed that under conditions of poor economic performance, CEOs with operations backgrounds were more likely to be selected, but operational CEOs were also unlikely to entrench themselves in their positions. In addition, the results show that for firms with favorable economic returns, CEOs with production backgrounds were more likely, particularly if firms were facing the threat of increased imports in their industry. Alternatively, firms with poor economic performance favored operations CEOs, and this effect was heightened in industries with a large number of exports.

We interpret the findings on changing conceptions of control in U.S. industry to imply neither institutionalization nor taken-for-grantedness in either the power or the theory behind any particular conception. While the 1970s saw the rise of finance and the finance conception and the 1980s the rise of both operations and production, neither our results nor Fligstein’s (1987, 1990) seem to support the view that any one background or conception of control became institutionalized. While some aspects of the finance conception of control may have become institutionalized, such as the multidivisional firm and mergers and acquisitions, there is little evidence that the conception as a whole, with its emphasis on portfolio management and the prominence of financial CEOs, ever became taken for granted or hegemonic. Although operations CEOs rose in prominence during the 1980s, they were neither hegemonic nor institutionalized, and their level of entrenchment was lower than for CEOs from production or marketing backgrounds. Given the lack of institutionalization of the finance or other conceptions of control, we cannot characterize the rise and decline of functional backgrounds as institutionalization and deinsitutionalization (Jepperson, 1991; Oliver, 1992). Instead, functional backgrounds of CEOs are best characterized not as institutional features of the U.S. industrial landscapes but as styles (White, 1992) that are subject to contestation.

Consistent with the view of conceptions of control as styles, the cultural assumptions behind prevailing conceptions were contested, the degree of isomorphism was weak for all backgrounds except production, there was limited inertia in background selection, frequent fluctuations reflecting current fashions, and no one function established hegemony over the U.S. manufacturing sector. The findings are also consistent with Jacoby’s (1990: 839) view that “control conceptions [do] not neatly follow in serial stages.” Rather than being consistent with the view that changing conceptions of control are episodic changes in prevailing institutions, with successive periods of institutionalization and deinstitutionalization, the findings are more consistent with the model of frequently fluctuating styles with limited entrenchment.

Although the findings are consistent with the model of the circulation of control and prevailing conceptions as styles rather than institutions, more research is needed to validate these findings. In particular, future research should examine the process of the circulation of control under various changes in prevailing economic, cultural, and political environments. In addition, more fine-grained analysis of the underlying processes of contestation and obsolescence is required. While we have assumed in this paper that every CEO succession and selection reflects a contest for control, these contests were not directly observed but were inferred from the data. Similarly, obsolescence was inferred from the instability in the power of functional backgrounds across generations of CEOs and across historical changes in prevailing ideologies and structural changes in the importance of strategic contingencies. The measures of intraorganizational political dynamics, in particular, while an important proxy, do not fully capture the complex processes that are affecting the obsolescence of functional backgrounds.

The circulation of styles contending for ideological and political control can be contrasted with the institutionalization of insider CEO selection in U.S. industrial corporations. Vancil (1987), Cannella and Lubatkin (1993), and Ocasio (1999) have studied the selection of insiders versus outsiders as CEOs and found both formalization of insider selection and persistence and entrenchment of insiders in a majority of large U.S. industrial corporations. While recent anecdotal evidence suggests that outsider selection may be increasing, the selection of insider candidates as CEOs was taken for granted in most corporations during 1960-1990. While insider selection is highly institutionalized in U.S. corporations, the same cannot be said about the selection of functional backgrounds of new CEOs, which is better characterized as a contest among contending styles.

Further research is needed to establish the conditions under which conceptions of control become taken for granted and institutionalized and those under which they fluctuate and remain contested. We have several theoretical speculations on what these conditions might be. First the degree of hegemony across organizations is likely to increase the entrenchment of a prevailing conception. The greater the diversity in prevailing conceptions across organizations, the lower the likelihood that any one conception will become entrenched and stable over time. While neither financial CEOs nor the portfolio management style were ever predominant or hegemonic across U.S. industry, other characteristics, such as the focus on short-term profitability and the multidivisional structure, were more widely diffused and are, according to this hypothesis, more likely to remain entrenched and to persist over time. Second, formalization is likely to increase the taken-for-grantedness of organizational forms and conceptions and their cultural persistence (Zucker, 1977). While insider selection becomes formalized in the internal labor market for CEOs (Vancil, 1987; Ocasio, 1999), the choice of a particular functional background is not part of the formal rules of CEO selection in any organization.

Third, the impermanence in power of particular functions and the contestation among styles does not imply that all styles are equally legitimate or that any individual style can gain power in U.S. industrial corporations. To the degree that opposing functional groups within an organization are structurally equivalent with members of incumbent groups, increased circulation among contending styles is likely. In many corporations, finance, production, marketing, and operations executives below the rank of CEO or chief operating officer are the structurally equivalent groups that are all part of the firm’s dominant coalition and potential candidates for CEO. Managers and executives from other functions, human resources, for example, are not structurally equivalent to the dominant coalition members, their styles and conceptions of control are less legitimate, and their exclusion from the CEO position is highly institutionalized.

Finally, intraelite contestation, while limiting the political entrenchment of any individual or function within the dominant coalition, helps deflect external challenges to the dominant elite and restricts the ability of nonelite groups to gain power and ascendancy or provide alternative styles or conceptions. The contestation and circulation among dominant coalition members thereby strengthens their oligarchic control (Michels, 1962) and the institutionalization of the status, power, and material wealth of the coalition as a whole. The circulation of control does not, by itself, transform the corporation or restructure its institutions. During the 1980s and early 1990s, finance CEOs and the finance conception declined, but the corporation’s focus on profitability and financial gain continued. There is little doubt, however, that the circulation of control influenced the changing strategies of the corporation.

We thank Ron Burt, Linda Johanson, Mark Mizruchi, Don Palmer, Dick Scott, Ed Zajac, four anonymous reviewers, and seminar participants at Chicago GSB, MIT-Sloan, Wharton, and Kellogg for their very helpful comments and suggestions.

1 The finance conception of control, although associated with CEOs from financial backgrounds, is inconsistent with modern finance theory. Contemporary finance theory stresses that financial diversification is best undertaken by individual investors rather than by corporations (Brealy and Myers, 1991). The term used by management scholars to refer to the finance conception of control is portfolio planning or portfolio management (Haspelagh, 1982).

2 The model of institutionalization of power, while influenced in part by institutional sociology, also draws on several other theories, including resource dependence, escalation of commitment, and strategic contingencies theory (Salancik and Pfeffer, 1977; Pfeffer, 1981). Both cultural and political theories are part of the model. Perhaps a more descriptive and less confusing term for it would be the model of entrenchment of power. In this paper we will continue to use the original term used by Pfeffer (1981) but want to explicitly state that any discussion or test of the model of the institutionalization of power in this paper is not intended as pertaining to or to be a test of institutional theory or the new institutionalism.

3 Corporate elites are also subject to contests for control with external factions, as in the case of hostile takeovers, which became common during the 1980s. External contests for control, while important mechanisms for elite circulation, are beyond the scope of this paper.

4 According to both the model of the institutionalization of power and the circulation of control, resource dependencies and strategic contingencies affect the ability of executives to exert power at any one time. They differ, however, in whether resource dependencies are likely to lead to political entrenchment (Salancik and Pfeffer, 1977) or whether they result in political circulation as structural contingencies change (Cyert and March, 1963).

5 The results were compared with the coding of functional backgrounds offered by Business Week, which began annual coding of functional backgrounds in 1987. Business Week’s coding is in general agreement with Forbes’, showing 21 percent of the firms in 1992 with finance and legal CEOs, lower than production and technical and marketing and sales. A difference resides in their classifications for operations and others, which changed from 51 percent in 1987 to 13 percent in 1988. This recoding of operations CEOs into other categories is unexplained. While there are differences in the two sources, both Business Week and Forbes show that finance CEOs were no longer dominant by the late 1980s.

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William Ocasio [coauthor, “The Circulation of Corporate Control: Selection of Functional Backgrounds of New CEOs in Large U.S. Manufacturing Firms, 1981-1992”] is an assistant professor of organization behavior at the J. L. Kellogg Graduate School of Management and of sociology (by courtesy) in the Weinberg College of Arts and Sciences, Northwestern University, Evanston, IL 60208 (e-mail: wocasio@nwu.edu). His research interests are in the areas of executive power and politics, organizational decision making, and organizational and institutional change. Recent publications include “Institutional Logics and the Historical Contingency of Power in Organizations: Executive Succession in the Higher Education Publishing Industry, 1958 to 1990,” with Patricia Thornton (American Journal of Sociology, vol. 105, forthcoming) and “The Evolution of Collective Strategies among Organizations,” with William Barnett and Gary Mischke (Organization Studies, forthcoming). He received an M.B.A. from the Graduate School of Business Administration at Harvard University and a Ph.D. in organizational behavior from the Graduate School of Business at Stanford University.

Hyosun Kim [coauthor, “The Circulation of Corporate Control: Selection of Functional Backgrounds of New CEOs in Large U.S. Manufacturing Firms, 1981-1992”] is a doctoral candidate in organization studies at the Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA 02139 (e-mail: hyosun@mit.edu). Her research interests include managerial succession, comparative corporate governance, and managing diversity, especially in the context of multinational companies. Her dissertation examines how the Japanese corporate governance system affects the CEO change process in Japanese firms. She received her M.A. in industrial and organizational psychology from Seoul National University.

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